315 / What is the tax treatment of life insurance purchased to fund a partnership business purchase agreement?

Premiums are not deductible whether paid by individual partners or by a partnership ( Q 274).¹ Assuming the requirements for employer-owned life insurance are met and there has not been a violation of the transfer for value rule, death proceeds are exempt from income tax whether received by partners or the partnership ( Q 8776).²

The basis to partners of their partnership interests is increased by proceeds received by the partnership.³

Similarly, under a cross-purchase plan, each partner’s basis for the partnership interest will be increased by the amount the partner pays for the partner’s share of a deceased partner’s interest.⁴

If an insured is a partner in a partnership, policies can be freely sold or exchanged between partners, or between partners and the partnership, without fear of adverse tax consequences from the transfer for value rule ( Q 289).

Even though proceeds are made payable directly to an insured’s personal beneficiary, a survivor may be able to include the proceeds in his or her cost basis if there is a legally binding agreement between the partners to apply the proceeds to the purchase of the business interest.⁵